Twitter (NYSE:TWTR) has had an awful start to the year with the stock down over 12% year to date. The stock is now trading just above $20 a share and in all earnest, the likelihood is that it will go lower. I have said repeatedly in my coverage that the S&P 500 experienced technical damage back in October of last year when it dropped to sub 1,900 and I believe we are at least going back there if not lower. When you take a look at the market over the last 15 years on a weekly moving average setting, it is evident that the market moves sharply down into a sharp intermediate bottom every 7 to 8 years. Furthermore the trigger for a sharp sell-off is a break of the 200 day moving average. When this has broken in the past, the market has dropped violently to the downside as shown in the chart below.

The line in the sand currently is 1,714 on the S&P500 which is still 200+ points from where the market is at the moment. A further 10% move lower to many may seem unlikely but we have this situation because the market is stretched way beyond its mean. I'm convinced the market will correct meaningfully (sometime in the next 6 to 18 months) and stocks like Twitter are going to get annihilated especially when you take into account its recent share price action. This then should present a great buying opportunity in the company for the following reasons.

Firstly the main reason why the stock lost almost 40% last year has been its sluggish user growth levels. Wall street currently seems to value companies based on the pace of signing up new numbers but I believe this valuation model will end soon especially if Twitter keeps on reporting strong top line growth every quarter. The social media company reported revenues of $569 million last quarter and is expected to announce $710 million on an EPS of $0.12 for the final quarter of 2015.

Bears state the Twitter's top line is slowing but if sales come in as expected, it will still be an increase of 48% over the final quarter of 2014. Investors shouldn't get hung on the bottom line. Amazon (NASDAQ:AMZN) has consistently reported negative net income totals in order to build the business which means that if Twitter posted robust user growth, bottom line figures would quickly be forgotten. In saying that Twitter's negative bottom line has been falling over the last 3 quarters (last quarter -$131 million) and the speed of getting earnings into the black should quicken when you take into account the 300+ people that were let go from the company last year. Research and development accounted for $207 million last quarter (on the expense side of the income statement) and as engineers were the primary sub-group that were let go, expect this number to fall in the quarters to come.

Apart from the inside team at Twitter doing an excellent job regarding the targeting of the ads, there is still plenty of potential for Twitter's revenue to grow meaningfully. You have Periscope and Vine which are still in their infancy regarding monitization but the main top line growth area (especially in the near term) is the monetization of its logged out users. Why?

Well these users make up over 500 million people that continue to visit the platform, but so far, Twitter hasn't made a red cent off them. Why? Well Twitter's objective has always been to sign up new users, as the perceived value of monthly active users is higher because of the higher engagement levels. Well Twitter has decided to ditch its former plan and I tend to agree with them especially as its logged out user count overshadows its total user base. If the number was smaller, it would be one thing, but we are talking about more than half a billion people here, that for whatever reason have decided not to sign up on the platform.

I have written previously how Twitter can also monetize these users, and even if Twitter only manages to eek out $2 (well over $6 presently from active users) from these users on an annual basis, you are talking about more than a billion being added to the top line yearly without much extra effort on the company's part. User or customer lists are what make online busineses' tick. Amazon and Facebook (NASDAQ:FB) epitomize this business model in that if you want to use their services, you must be signed up to their platforms. However the next most important component of online business success is traffic and Twitter has it in spades. Don't expect the company's top line to slow down any time soon.

Since earnings is in the red, I have always advised investors not to watch Twitter's price to earnings ratio. With the market cap dipping below $14 billion, Twitter's price to sales ratio is just under 7 compared to Facebook's 17.3. Furthermore Twitter's top line is still growing faster than Facebook's turnover despite its sluggish user growth. Another huge factor in Twitter's favor is the growing global e-commerce trend, as companies spend more and more on advertising revenue every year. Thirdly if the 10,000 character limit is rolled out, I think the pros outweigh the cons in the sense that the platform will be able to generate more unique text which search engines love for unique listings. This definitely will increase traffic over the long term and fears about core twitter users vacating the platform are over-hyped in my opinion as the platform will still be able to function as it is currently. Moreover user value (over $6 per year per user at the moment) should go up if people are tweeting longer messages as engagement levels will rise. This is another factor wall street is missing in my opinion.

To sum up, Twitter is still an attractive stock but it may fall more in the short term due to current volatility in the equity markets. However monetization of logged out users plus higher engagement levels should mean revenue growth should continue on a elevated path. This stock is still one of fastest growing (revenue-wise) stocks in the large cap tech sector. It will find a bottom and value hunters will be there is spades when it does so.

Twitter Stock Articles & Video

Keith Coleman is the 4th VP of Product since 2013. Can he do what other have failed to do?Engagement levels will only increase meaningfully on Twitter if the company can add more value by means of higher quality live eventsTechnically the stock is under pressure to hold its 200 day moving average which is worrying

Canaccord Genuity’s Michael Graham sees user growth and engagement improving in Q4. SoftBank's plan to invest in the US, and a Forbes article seem to have fueled buyout speculation. If you own, or plan to own TWTR shares though, a deeper look may be warranted.

Twitter CFO Anthony Noto is replacing outgoing COO Adam Bain. Twitter is now bringing in Keith Coleman as product head, its third change in the role this year. All these changes could be hurting investors in less visible ways.

Twitter has given investors quite a few things to cheer about this year. Yet, the micro blogging site does have a major few issues to sort out. We'll look at the hits and misses for Twitter Inc in 2016, and help you answer the question.

Rumor mills are at it again, with multiple news agencies fueling Twitter buyout rumors. The chatter is based on one of the usual suspects, Salesforce. The 'rationale' at the heart of these rumors appears to be rather suspect. Here's why.

I do not hold any positions in the stocks mentioned in this post and don't intend to initiate a position in the next 72 hours

I am not an investment advisor, and my opinion should not be treated as investment advice.

I am not being compensated for this post (except possibly by Amigobulls).

I do not have any business relationship with the companies mentioned in this post.

Amigobulls Disclosures & Disclaimers:

This post has been submitted by an independent external contributor. This author may or may not hold any positions in the stocks discussed. Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. Amigobulls has not verified the author’s positions in the stocks discussed, and does not provide any guarantees in this regard. The author may be paid by Amigobulls for this contribution, under the paid contributors program. However, Amigobulls does not guarantee the authenticity or accuracy of the information provided by the author in this post.

The author may not be a qualified investment advisor. The opinions stated in the post should not be treated as investment advice. Buying and selling of securities carries the risk of monetary losses. Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions.

Amigobulls does not have any business relationship with any of the companies covered in this post. This post represents the views of the author/contributor and may not reflect the views of Amigobulls.

show more

Comments on this article and TWTR stock

Abuse is clearly tolerated, with social media professionals being suspended for no discernable reason as others can abuse. Twitter's MAU problems are entirely self induced through no discernible fairly enforced moderation or safety policy.

Until twitter fixes their problems, which social media professionals have known of for a long time, but the media and general public really didn't realize they will continue having massive problems attracting new customers.

Join Us On

Get Amigobulls On

Copyright2014 amigobulls.com

Historical, current end-of-day data, and company fundamental data provided by Zacks.
All information provided "as is" for informational purposes only, not intended for trading purposes or advice.
Neither Amigobulls nor any of the data providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the amigobulls.com, you agree not to redistribute the information found therein.
Please read our terms of use and privacy policy.